PennyMac Mortgage Investment Trust (PMT), American Capital Agency Corp. (AGNC): 35% Total Return Potential Not Without Risks

PennyMac Mortgage Investment Trust (NYSE:PMT) provides you with an upside of 25% and a dividend yield of 10%. This 35% total return seems very attractive, but you must dig deeper to look at the associated risks. Let’s see what the company does, why its attractive and the risks it carries with itself.

PennyMac Mortgage Investment Trust (NYSE:PMT)

What it does?

PennyMac Mortgage Investment Trust (NYSE:PMT) is a hybrid mortgage REIT with investments in both Agency and non-Agency MBS. Besides, the company has investments in distressed mortgage loans. For the purpose of reporting, the company’s business is divided into two business segments; correspondent lending and investment activities.

Why it is attractive?

Like the rest of the mortgage REITs, PennyMac Mortgage Investment Trust (NYSE:PMT) is in demand for its elevated dividend yield of 10.16% on a quarterly dividend rate of $0.57 per share. The quarterly dividend rate increased after the second quarter of the current year when it paid $0.55 per share. This is despite sector wide dividend cuts in the mortgage REITs sector.

Apart from the elevated dividend yield, investors can expect capital appreciation of 25%. The stock is currently exchanging hands at $22.4 per share, against a mean price target of $27.92 per share. Therefore, the total return of around 35% seems very attractive.

The total return potential becomes very attractive especially when a large proportion of the return is coming in the form of regular dividends. Here it’s around a third of the total return.

Higher return comes with higher risk

The risk-return tradeoff dictates that high return is not without high risk. So, before the attractive total return potential in PennyMac Mortgage Investment Trust (NYSE:PMT) consumes you, you should be well aware of the risks associated with the stock.The most significant risk at this point for PennyMac Mortgage Investment Trust (NYSE:PMT) are a decline in the US home prices and the company’s portfolio credit risk. While the Fed has been busy making housing affordable by stimulating the US housing markets, the markets have shown little improvements with mixed signals puzzling the investors. The value of the loans and mortgage securities PennyMac Mortgage Investment Trust (NYSE:PMT) holds are directly linked to the underlying home prices. So, if the stimulus proves to be ineffective and the prices start declining, the fair value of PennyMac Mortgage Investment Trust (NYSE:PMT)’s loans and securities will decline accordingly. This could result in significant losses to the company, eventually hampering is dividend paying ability.